Gasoline Subsidy: Good Intentions are not Enough

Thompson Ayodele and Paul Adepelumi*

Last year, President Bola Tinubu was declared winner of the presidential election. He has the political capital to initiate policy that will rejuvenate the economy and stem spiraling prices of goods and services. President Tinubu did not during the campaign state the key policy areas which he would focus on. However, on day-one of his administration the first policy pronouncement was the removal of gasoline subsidy. Whether the removal of subsidy was part of his economic agenda with well-thought-out plans to mitigate the effects on Nigerians is debatable.

The reason for subsidy removal is to eliminate the financial burden on Nigeria. According to president Tinubu, the subsidy system has become a means for a small group of wealthy individuals to amass significant wealth, thus undermining the integrity of Nigeria’s economic and democratic institutions. The administration is therefore of the view that yanking off subsidies will increase fiscal savings, boost investment in the energy industry, and promote economic diversification. Achieving the intended results is another challenge, largely driven by multiple factors, including economic, and social considerations.

However, the administration response indicates the policy was not well planned considering the effects on households purchasing power and the costs of transporting goods from point A to B. Rather the government relied on sharing money or throwing money at the problem approach to cushion the effects. Throwing money at the problems measures such as N75 billion for manufacturers, N185 billion as palliatives for states, N315 billion to pay federal workers’ N35,000 allowance for six months, N1.13tn to 15 million households at N25,000 per month for three months, and N75bn loan facility to 1.5 million market women had little or no effect. This prompted the federal government to partially reverse its pledge to forgo fuel subsidies because of increasing costs of living. The palliative measures spearheaded by the states and federal government were ineffective.

Of course, the goals of subsidy removal are to enhance fiscal savings, encourage investment in the energy sector and promote economic diversification. While these goals align with the federal government’s economic development objectives, there are key issues to be considered. First, price increases are expected on goods and services. This is now evident. Second, subsidy removal has shown little impact on private sector investment. Third, about 75 percent of governments that removed subsidies in developing countries experienced violent conflict or failed to win re-election.

There are noticeable mis-steps in the implementation of subsidy removal. The aim here is to offer suggestions that the government would need to incorporate into the implementation of its energy sector reform. First is to develop a comprehensive energy sector reform plan with a clear long-term objective. The long-term objectives include increasing the share of renewable energy in the energy mix. The share of renewable energy in the energy mix could reduce Nigeria’s dependence on fossil fuels and promote a more sustainable energy sector. The next is improving energy efficiency across all sectors, including industry, transportation, and buildings, could help to reduce energy consumption and lower costs for consumers. This improvement will expand access to energy, particularly in rural areas, and will improve the quality of life and support economic development.

Before the implementation of the subsidy the new government ought to have analyzed the effect on the economy, society, and the environment, including the benefits and costs of reform. Understanding the potential impacts on the economy, and low income earners are essential. Analyzing the effect involves assessing the benefits and costs of the proposed changes, which should inform decision-making and help minimize unintended consequences. For several reasons, exploring the impact of fossil subsidy removal reforms in Nigeria is essential.

Firstly, it can help to determine whether the proposed reforms will achieve the desired objectives, such as reducing the budget deficit, promoting sustainable development, and increasing access to energy. Secondly, it can identify potential risks and unintended consequences, such as inflation, or social unrest, which can be mitigated through targeted policy interventions. Finally, it can help to build public support for the reforms by providing clear information on the expected outcomes and costs. Overall, analyzing the impact of reforms ought to have been a critical step. It provides essential information to policymakers, stakeholders, and the public on the expected outcomes and costs of the proposed changes, which can help to build support for the reforms and ensure their effectiveness.

At the outset of fuel subsidy removal, the government should have developed a clear strategy for attaining its objectives. The plan should include a timeframe, goals, and key performance indicators to measure progress and keep the change on track. The government should also evaluate the resources and capacity required to implement the strategy. This may involve the requirement for technical skills, financial resources, institutional backing, and prevent price gouging . The administration should have addressed the importance of public awareness efforts in supporting the change and ensuring stakeholders understand the plan’s logic. The road plan will show that subsidy reduction is inclusive and considers the concerns of many groups. For example, providing support to the solar panel industry would have created new jobs and stimulated economic development, improved public health and energy security, and reduced fossil fuel consumption, which will naturally crash the demands for fossil fuel and its antecedent impacts on the economy.

The roadmap should also be adjustable and agile in response to the changing conditions. The government should be prepared to change the plan as needed to guarantee that the reform is viable in the long term. Above all, stakeholders such as the Nigeria Labor Congress, the Nigeria Trade Union, and the public should get clear communication about the strategy. This will increase support for the change and ensure stakeholders understand the government’s aims and objectives. The government could also consider releasing frequent updates on the roadmap to promote openness and accountability. The administration’s attempts to mitigate the impact of price adjustments on low-income households were misguided because of the lack of a defined plan. First, the government depended on direct financial transfers. Throwing money at issues does not work. All levels of government offered palliatives. On the contrary, these palliatives were both ineffective and performed badly. The lack of a reliable database to track who is qualified to receive cash transfers hampered any cash transfer programs. Politicians and their cronies across Nigeria were concerned about palliative care and monetary transfers because they would be the beneficiaries.

Nigerians spend 75 per cent of their incomes on foods and other basic items. The best approach to actually cushion the effect of price adjustment is to target which products or food items which millions of households buy daily. These products and the companies that produce them could be targeted for direct subsidy. This will enable the companies to sell their products at a reduced price because of direct subsidy from the government. Industries and items such flour, sugar, spaghetti, cooking oils etc. and real farmers (not overnight farmers) can also be targeted. The products will be sold at a cheaper price. Given the low purchasing powers of Nigerians, many will be able to buy these items at a lower cost.

Relying on a single energy source is not sustainable for a country like Nigeria. Diversifying the energy mix with investment in renewable energy sources like solar, wind biomass will be helpful. The advantage is that by relying on various renewable energy sources, a dependence on a single energy source will cease. Luckily, renewable energy sources are available locally. For example, Northeast and Northcentral have more substantial wind movements. Wind energy can be generated by creating momentum, and transferring it to rotor blades. Government can offer a range of incentives to stimulate investment in the sector. Aside from providing alternative energy sources, investment in renewable energy will create employment and generate other economic activities.

Finally, whatever strategy the government takes in addressing the energy crisis in Nigeria, the overarching objective is to be transparent and communicate milestones or challenges to the public expeditiously. Surreptitiously doing the opposite of what is communicated only for Nigerians to find out through alternative channels will bring about resentment and ultimately cause the government to lose credibility. Good intentions are not enough.

· Thompson Ayodele is a Research Fellow with the American Enterprise Institute, a Washington, DC based think tank and Dr. Paul Adepelumi is of Harvard University.